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Four things advisers can do to manage conflicts

Many financial advisers don’t think they have a conflict of interest, but they might be wrong.

Thanks to the Royal Commission, everybody is talking about vertical integration and in-house conflicts. We explain what this means and highlight four things advisers can do to manage conflicts effectively.

I’m a financial adviser. Am I conflicted?

Probably. Vertically integrated structures are common in the wealth management industry and it’s not just the big banks that use them.

Putting yourself in the position of a financial adviser:

  • Do you recommend financial products (including managed accounts) that are issued or operated by your licensee or corporate group?
  • Do you recommend financial products that will give you, your licensee or your corporate group some type of financial benefit?

If you answered yes to either of these questions, congratulations! You’re conflicted.

So, is my business doomed?

No. Commissioner Hayne toyed with the idea of separating product and advice – known as ‘structural separation’ – but in the end he rejected the idea.

But don’t celebrate just yet.

While Hayne decided that it should be possible for advisers and licensees to manage in-house conflicts effectively, he was damning of the poor consumer outcomes caused by in-house conflicts in recent years.

We expect ASIC to scrutinise vertically integrated structures and in-house product recommendations this year. So advisers and licensees need to be able to demonstrate that they understand the conflict and can manage it effectively.

How do I do that?

You have to place your client’s interests above your own. In most cases, your client will have an existing product. So you should:

  • Perform a comparative analysis of the pros, cons, fees, risks and benefits of their existing product vs your in-house product, and
  • Explain why your in-house product is better for your client than their existing product. It’s not enough to just tell the client you have a conflict.

In-house product recommendations will generally be inappropriate if:

  • The benefits of the in-house product are lower, or
  • The costs of the in-house product are higher.

The exception to this is if there is a clear justification for your recommendation. For example, if your in-house product addresses a specific client need or objective that the existing product doesn’t.

If you can’t easily explain why you’re recommending your in-house product, don’t do it.

Is that all?

No. You have to record all of this on the client file and explain it in the Statement of Advice. Most advisers don’t do this adequately.

If your advice is not properly documented and explained, you are effectively guilty until proven innocent.

So, what should I do?

You can demonstrate that you are managing your in-house conflicts by doing these four things:

  1. Properly research your client’s existing product
  2. Link each recommendation to your client’s needs and objectives
  3. Explain why your in-house product is better for your client than their existing product, and
  4. Record all of these things on the client file.

What should I do next?

Review your advice procedures and conduct a gap analysis. If you have any questions or concerns, get in touch.

 

Simon Carrodus is a Solicitor Director at The Fold Legal. This article is general information and does not consider the circumstances of any individual or business.

 

7 Comments
DavidV
November 07, 2019

Well said and explained..pity you were not interviewed by the hayne comm

DavidV
November 07, 2019

Well said and explained..pity you were not interviewed by the hayne comm

Wayne
August 30, 2019

Hayne's recommendations have only entrenched power in the large institutions.
He was extremely quiet and essentially avoided the matter of intra fund advice and the conflicts within the industry fund network.
We’ll look back on this period as a witch hunt that destroyed a valuable service.
People will be forced back to the large institutions or avoid advice simply because of the cost. Excessive government regulation has a history of disastrous outcomes.

Chris DiMattina
August 29, 2019

The new FASEA Code of Ethics is very strong and definitive about conflicts of interest - you cannot have them, full stop! If there is a conflict you are not to act for the client. No more managing a conflict by disclosing and obtaining client consent. Hopefully there is further guidance on this because as it sits it appears practically unworkable.

SMSF Trustee
August 30, 2019

As an intelligent client, I am perfectly capable of telling when my planner is advising something with a potential conflict and making my decision.
An example. I use AMP's Ascend administration platform. My advisor when I made the decision was an AMP licensee. He showed me a range of options for this service, but Ascend was head and shoulders the best. I could easily have looked even more broadly, but I ended up with a service that does all my auditing, tax returns and other legal work (eg turning my little notes for file into formal Trustee meeting minutes) for a very, very reasonable fee. I get an online capability to approve things, change things and control payments into and out of the fund.
Yes, he had a conflict of interest. But he declared it and we managed it.
How the heck would it have been in my best interests if he'd been forced NOT to recommend the best option for me just because he happened to be employed by them? Give me a break!

Simon
September 03, 2019

The Explanatory Statement softens Standard 3 somewhat.

It states that an adviser "will not breach Standard 3 merely because you recommend to a client financial
products offered by your employer or principal. However, you will breach Standard 3
if a variable component of your remuneration depends on the amount or volume you
recommend of those products..."

I agree that this is not entirely helpful. It places us back in the world of grey to which we have become accustomed.

Frank
August 29, 2019

Just because investment management is outsourced, doesn't make it better. There are plenty of 'external' fund managers struggling and even closing, so why was choosing them in the client's best interests?


 

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